Category: Business Aviation and the Boardroom
Author: David Wyndham
Chargebacks, transfer fees or other methods for allocating the cost of aviation services among departments are important considerations in the management of a business aircraft. As chargebacks can drive utilization, tread carefully cautions David Wyndham.
A chargeback is an attempt to allocate the cost of providing the air transportation service to the departments that use it. Whereas corporate functions such as legal, finance or human resources are more-or-less equally spread throughout the company, the use of the aircraft typically is not. In general, the business aircraft - due to its cost and the limits to its availability - is restricted to providing air transportation to high value individuals or teams of individuals.
How the use of the aircraft is restricted is fundamentally important in deciding on a chargeback scheme. If the aircraft is limited to a very small circle of senior executives, or even to one individual (e.g. the CEO), then the cost of the aircraft can be allocated 100% to the (C-level) headquarters budget. The total cost of the corporate headquarters function is then allocated to the various business units by a common method.
If the aircraft is made available to different departments, divisions or subsidiaries, then some method of charging those business units for its use may be appropriate. The general chargeback principle is that those who use the aircraft pay an equitable share for that use. Chargebacks can range from a 100% reimbursement of all costs to something less than full cost recovery. There are, however, three considerations pertaining to chargebacks:
1. Metering: High chargeback rates will reduce the aircraft usage, while low (or non-existent) chargebacks encourage aircraft usage.
2. Consistency: Is there an established protocol at the corporate level for distributing other centralized costs? Can an existing policy be applied to the aircraft?
3. Relevance: When using chargebacks, there must be an accurate accounting of the aircraft costs that supports the chargeback method.
CENTRALIZED ALLOCATION METHOD
Some corporations combine all of the headquarters service costs, including the aircraft, and divide those costs among all the operating divisions. This method is the easiest to manage as the aircraft costs are combined with the other corporate functions and thus require little additional accounting.
It also accounts for 100% of the aircraft costs. This method also places essentially a zero cost to non-headquarters business units that may use the aircraft. If those business units have access to the aircraft, this method encourages use. Thus, a clear policy for who has access to the aircraft, along with some sort of prioritization, is needed.
When allocating the aircraft costs in proportion to its use, the corporation can elect to recover all, or a portion of the costs. Again, the higher the cost, the less likely a business unit is to use the aircraft.
FULLY-LOADED COST ALLOCATION
A fully-loaded cost allocation is an attempt to allocate 100% of the aircraft costs among the users of the aircraft. If headquarters used the aircraft 67% of the time and sales 33%, then sales should pay 33% of the aircraft budget.
Where this gets difficult is in budgeting and setting the rate. Rates can be by the hour, mile, or seat-mile. If the actual costs exceed the budget, how are the added costs to be recovered? Or, if costs are lower than budgeted, will funds be returned to the business units? Does the full allocation include depreciation of the aircraft or just its operating costs? This method requires a clear understanding of the aircraft costs and an accurate budget.
OPERATING COST ALLOCATION
The operating cost allocation involves some formula to cover the Variable Operating Costs (fuel, maintenance, etc.) and the Fixed Operating Costs (crew salaries, hangar, insurance, training, etc.). The options range from a percentage of the variable costs to recovering 100% of those costs. This chargeback method, which can be in the form of an hourly cost or a seat-mile cost, also requires a clear understanding of the aircraft costs and an accurate budget.
In the US, the Internal Revenue Service uses Standard Industry Fare Levels in imputing the value of private air travel for non-business/personal use. These IRS SIFL rates (which are based on distance and seats, not the actual cost of operating the aircraft) can also be used for the chargeback cost of the business aircraft.
FIRST CLASS AIRFARE
This chargeback avoids the requirements for detailed aircraft accounting and assigns a predetermined First Class Airfare cost to the use of the aircraft. This method works well for a scheduled shuttle where a business unit can buy seats versus using the whole aircraft.
There may be other formulas in use such as per-mile allocations, an allocation of the depreciation of the aircraft, or a hybrid-mix of the above formulas. Regardless of methods used, the accounting records must reflect the chargebacks to all users of the aircraft.
A final note: Business aircraft operate in the US under FAR Part 91 and are classified as non-commercial transportation, whereas Part 135 allows for commercial transportation for which compensation is collected. The IRS may question the aircraft chargebacks and in some cases reallocate them during an audit. Care must be taken to avoid any action that either suggests or creates a separate company to provide air transportation services to the corporation unless that separate company holds a Part 135 certificate. For corporations that own an aircraft for its own use, chargebacks are an acceptable way to allocate the use of the business aircraft among the company’s departments.
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